Metered Billing: The Iceberg That’s Bearing Down On Your Business Model

Posted on November 3, 2011

I want to talk about something that’s looming in the not-so-distant future that could kill a whole bunch of the most promising online businesses: metered billing for mobile data.

One of the biggest trends in tech over the last decade has been the emergence of what’s generally dubbed “cloud computing.” In non-nerd terms, what that means is providing resources that used to only be available directly on your local PC remotely over the Internet.

Over the last couple of years, we’ve started to see cloud companies emerge that are aimed directly at the consumer.  Netflix, for instance, has moved aggressively (some might say too aggressively) into the cloud with its streaming service.  Their pitch is classic cloud marketing: instead of collecting DVDs of your favorite movies, which you then have to cart around with you to watch, you can just subscribe to Netflix and have them all delivered to you anywhere online. Music services Spotify and Pandora do the same thing with your music collection.  Dropbox does the same thing with your files.  And so on.

The key to the appeal of all of these services is that they combine convenience with savings.  If Netflix has the movies you want to watch, subscribing to their service makes it easier to access those movies anywhere than DVDs do, while simultaneously being cheaper than buying every movie on DVD.

But the convenience and the savings of cloud services stem from a couple of assumptions — that your connection to the Internet is always on, and that it’s billed at a flat rate. If your access to the Internet is limited, cloud services suddenly become a lot less convenient, because you suddenly have less access to your stuff than you would if you had carried copies with you.  And if your access to the Internet is billed by usage, cloud services suddenly become a lot less cheap, because it takes a lot of bandwidth to continuously shuffle files across the network.

As long as the primary platform people used to access online services was the desktop PC, these assumptions held, because the average desktop PC’s user’s internet connection is both always on and flat-rate billed. The always-on part has been the case since the emergence of affordable broadband in the early 2000s, and the flat-rate part has been central to ISP billing plans since the mid-1990s.

The problem is that the primacy of the desktop PC as users’ primary gateway to the Internet is waning. And on the devices that are taking its place — smartphones and tablets — always-on, flat-rate Internet access can not be taken for granted. Even worse, the trend line is curving in the opposite direction: fewer and fewer mobile users have access to always-on, flat-rate Internet service with each year that goes by, at least in the United States.

Mobile users have two ways to get online. The first, Wi-Fi, offers reasonably fast wireless connections that are generally billed by time used rather than bandwidth used (or provided free); but outside public spaces like airports or restaurants Wi-Fi the gaps in coverage are big enough that you can’t be certain you’ll always be able to get online.

The second option is cellular data connections. All major US cellphone carriers offer data plans that let you connect to the Internet. Unlike Wi-Fi, cellular satisfies the always-on criterion — cell coverage is broad enough that in most parts of the country you can rely on having access to a connection if you want one. But unlike Wi-Fi, cellular connections are not generally available at flat rates anymore.

Thanks to an orgy of consolidation, there are four national cellular networks in the US today: AT&T, Verizon, T-Mobile, and Sprint. Of these, only one — Sprint — currently provides a flat-rate, “all you can eat” data plan. AT&T and Verizon used to provide such plans, but have recently dropped them and shifted entirely to “metered billing,” in which the amount you pay for your service is set by how much bandwidth you use.  T-Mobile’s advertising might lead you to believe they offer flat-rate unlimited plans, but in fact they silently throttle your data connection if you use more than a couple of gigabytes in a month.

So if you’re a mobile customer who wants a flat-rate data connection, you have exactly one choice: Sprint. And even Sprint has begun edging away from unlimited data plans, raising the prospect of there being no providers of such plans in the US market in the near future.

What do these shifts mean for people who are building online businesses, especially cloud-oriented ones? The short answer is, they’re dangerous. Incredibly dangerous. Because they strike directly at the key things that make cloud services appealing to users — convenience and savings.

The risk they pose to the savings element of the cloud pitch is obvious: if users are getting charged by the byte, services that make extensive use of the network will mean higher costs.

The risk they pose to the convenience element is less obvious, but in my view, it’s the bigger threat of the two. The core of it is this: a cloud service is only as convenient as local storage if retrieving data from the cloud service is indistinguishable to the user from retrieving it from local storage. That’s the case when you have an unlimited, flat-rate data plan, because the marginal cost to the user of pulling a byte from the cloud is the effectively the same as pulling it from their local disk. But with metered plans, suddenly the user has to think about each byte they pull from the cloud before they pull it down. Will this be the byte that starts the meter running? That’s a question they don’t have to ask with local storage.  There’s no coin slot on their Flash memory card that they have to pump a nickel into every time they want to play a song.

That difference puts any business model that’s built on replacing a local service with cloud service at risk, because it makes your business a second-class citizen. Your service now comes weighted down with a bunch of questions, and even if the answers to those questions work for some users, the very fact that they have to deal with them makes your offering less attractive. Many will avoid wrestling with them altogether by the simple expedient of not trying your service at all.

For now, the mobile market is still a secondary market, so this isn’t a make-or-break concern. But that’s becoming less and less true every year. It’s not hard to imagine a near future where the desktop PC and its flat-rate data connection is relegated to a few small niches, with the rest of the market being ruled by mobile devices with metered billing plans.

And if you’re running a cloud service, that’s a future that’s not buying what you’re selling.